Your Record Keeping Matters

Deductions for business Meal and Entertainment expenses, business use of cars, and business gifts must be backed up by adequate records or sufficient evidence that corroborate the taxpayer's own statement and show:

• the amount of the expense;
• the time and place of the travel or entertainment, or use of the facility or property (for example, the use of a business car); or
• the date and description of the business gift; the business purpose of the expense or other item; and
• in the case of business entertainment or gifts, the business relationship of the person being entertained or receiving the gift

The taxpayer also must be able to prove the amount of any $75-or-over business-entertainment expense. A restaurant receipt is enough to prove a business-meal expense, if it carries the name and address of the restaurant, number of people served, date, and amount of the expense.

Form of the Expense record. Records should be kept in a diary, log, or other systematic format. A partial record can be combined with documentary evidence (for example, receipts) to establish all the necessary elements—time, place, amount, and business purpose. The record need not be made “contemporaneously.” However, the IRS regs say that a record made “at or near” the time of the expenditure is the strongest form of evidence. Generally, records must be in writing. However, business usage (but not out of pocket expenses) of listed property (such as cars) may be tracked on a computer.

The IRS regs allow substantiation by means of a corroborated statement of the taxpayer only if: (1) the statement, whether written or oral, contains specific information in detail as to the element to be proved, and (2) the taxpayer presents other corroborative evidence sufficient to establish that element.

The corroborative evidence must be either direct evidence, such as a written statement or the oral testimony of persons with knowledge of the element to be proved, or documentary evidence, such as receipts, paid bills, etc. If the element is business relationship or business purpose, the supporting proof can be circumstantial evidence.

Lost records. If a taxpayer's records of business expenses are destroyed because of circumstances beyond the taxpayer's control (for example, flood, fire, earthquake, or other casualty), he can claim the deductions based on a “reasonable reconstruction” of the records.

Who must retain records and receipts? Self-employed taxpayers, as well as employees who aren't reimbursed, or are treated as unreimbursed under a nonaccountable plan, keep their own records and will need them to defend deductions in the event of audit. By contrast, if an employee is reimbursed under an accountable plan, and makes an adequate accounting to the employer, the substantiation burden generally shifts to the employer once the necessary records and receipts are turned in to the company. However, employees reimbursed under an accountable plan must keep a copy of their business expense records and receipts if:

• actual T&E expenses exceed the reimbursement, and the employee deducts the excess (as a miscellaneous itemized deduction subject to the 2%-of-AGI floor);
• the employee is related to the employer within the meaning of Code Sec. 267(b) , using a 10% test; or
• the company's substantiation procedures are inadequate (e. g., executives account to themselves and to no one else).
It’s March 1, so the Business filing deadline is quickly approaching. Don’t procrastinate taxpayers! Get your information over to your CPA as soon as possible. As the heat of the summer and tax season approaches, remember that your CPA is only as good as you let them be. The better and more accurate your records, the better your CPA can perform in helping you with tax and business planning.

brad@mcarthurco.com
704.544.8429